Thursday, July 13, 2017

You Can’t Build a Low-Cost Airline Without Low Costs: Norwegian Air wants to upend the market for travel between the U.S. and Europe; but rapid expansion has come at a cost

The Wall Street Journal
By Stephen Wilmot
July 13, 2017 10:10 a.m. ET

Norwegian Air Shuttle served up a reminder Thursday of why disruptive companies don’t always make good investments.

The airline is investing aggressively in cheap trans-Atlantic flights. Last week it announced another raft of new routes between the U.S. and Europe, including $174 fares between Chicago and London from next spring. Norwegian’s long-haul capacity will increase by 60% this year and double next year, notes brokerage Davy.

But rapid expansion has come at a cost. Even stripping out fuel, second-quarter unit costs rose 7% year over year, management announced Thursday. Unit staffing costs ballooned 12% as the company prepared to ramp up intercontinental operations. Second-quarter unit costs, excluding fuel, have now been rising for four years.

This looks like a big problem. You can’t build a low-cost airline without low costs.

Trans-Atlantic flying is currently dominated by three full-service alliances: American Airlines and British Airways parent IAG, Delta and Air France-KLM , and United Airlines and Lufthansa . Having seen their short-haul business upended by low-cost challenger Ryanair , the European players are paying very close attention to Norwegian’s ambitions. All three have launched no-frills long-haul subsidiaries to compete. Norwegian can’t count on the complacency that opened a gap for Ryanair.

The other problem with Norwegian’s mounting costs is that they weigh on cash flows and hence its debt-encumbered balance sheet. Shareholders’ equity accounted for just 8% of total liabilities at the quarter-end. This leverage explains why the stock, which is heavily shorted, plunged 11% in morning trading. Year-to-date it is down more than a third, even as other European airline stocks have soared.

The company’s long-term finance director quit last week. His successor can be under no illusion: If Norwegian really is going to disrupt the current trans-Atlantic oligopoly, it needs to get costs under control.

https://www.wsj.com

4 comments:

Anonymous said...

Most concerning to me- what are they paying their crew? Are these pilots qualified? Pay people peanuts get monkeys for employees.....

Anonymous said...

How about a comparison to WOW Airlines? They seem to be doing fine. So, compared to Norwegian, what are they doing right?

Anonymous said...

With their short haul businesses being disrupted by the low fare carriers, you would think the majors would get smarter. I won't hold my breath. I hope Norweigan is successful and others follow. The majors will try to block Gates at major airports. Let's hope the airport administrations don't let them get away with it.

Anonymous said...

If cabin crew quality is any indication of pay, all US based cabin crew are overpaid by a significant factor. Starbucks gives better service and they pay what....$10/hour.